Chapter 23

Chapter 23-1

Chapter 23-2

C H A P T E R C H A P T E R 2323

STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

Chapter 23-3

Learning ObjectivesLearning Objectives

Chapter 23-4

Preparation of the Preparation of the StatementStatement

Special Problems Special Problems in Statement in Statement PreparationPreparation

Use of a WorksheetUse of a Worksheet

UsefulnessUsefulnessClassification of cash Classification of cash flowsflowsFormat of statementFormat of statementSteps in preparationSteps in preparationExamplesExamplesSources of informationSources of informationIndirect vs. direct Indirect vs. direct methodmethod

Adjustments similar to Adjustments similar to depreciationdepreciationAccounts receivable (net)Accounts receivable (net)Other working capital Other working capital changeschangesNet lossesNet lossesGainsGainsStock optionsStock optionsPostretirement benefit Postretirement benefit costscostsExtraordinary itemsExtraordinary itemsSignificant noncash Significant noncash transactionstransactions

Preparation of Preparation of worksheetworksheetAnalysis of Analysis of transactionstransactionsPreparation of final Preparation of final statementstatement

Statement of Cash FlowsStatement of Cash Flows

Chapter 23-5 LO 1 Describe the purpose of the statement of cash flows.

Primary purpose: To provide information about a company’s cash receipts and cash payments during a period.

Secondary objective:To provide cash-basis information about the company’s operating, investing, and financing activities.

Section 1 - Preparation of the Section 1 - Preparation of the Statement of Cash Flows Statement of Cash Flows

Chapter 23-6 LO 1 Describe the purpose of the statement of cash flows.

Usefulness of the Usefulness of the Statement of Cash FlowsStatement of Cash Flows

Provides information to help assess:1. Entity’s ability to generate future cash flows.2. Entity’s ability to pay dividends and obligations.3. Reasons for difference between net income and

net cash flow from operating activities.4. Cash and noncash investing and financing

transactions.

Chapter 23-7 LO 2 Identify the major classifications of cash flows.

Classification of Cash FlowsClassification of Cash Flows

Income Statement

Items

Operating Activities

Generally Long-Term Asset Items

Investing Activities

Generally Long-Term Liability and

Equity Items

Financing Activities

The term “Cash” = Cash and cash equivalents.

Chapter 23-8

1 The basis recommended by the FASB for the statement of cash flows is actually “cash and cash equivalents.” Cash equivalents are short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Examples of cash equivalents are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.

Cash and Cash Equivalent

Text Footnote 1, page 1245Text Footnote 1, page 1245

LO 2 Identify the major classifications of cash flows.


Chapter 23-9

Classification of Typical Inflows and Outflows



Illustration 23-1Illustration 23-1

Income Statement

Items

Chapter 23-10




Generally Long-Term Asset Items

Illustration 23-1Illustration 23-1

Chapter 23-11




Illustration 23-1

Generally Long-Term

Liability and Equity Items

Chapter 23-12

Typical Company

Product Life Cycle




Format of the Statement of Cash Format of the Statement of Cash FlowsFlows

Order of Presentation:1. Operating activities. 2. Investing activities.3. Financing activities.

Report inflows and outflows from investing and financing activities separately.

Direct Method

Indirect Method


Format of the Statement of Cash Format of the Statement of Cash FlowsFlows Illustration 23-2

Chapter 23-15

Three Sources of Information:1. Comparative balance sheets2. Current income statement3. Selected transaction data


Steps in PreparationSteps in Preparation

Three Major Steps:Step 1. Determine change in cash.Step 2. Determine net cash flow from operating

activities.Step 3. Determine net cash flows from investing and

financing activities.


First Example - 2009First Example - 2009

Illustration: Tax Consultants Inc. started on January 1, 2009, when it issued 60,000 shares of $1 par value common stock for $60,000 cash. The company rented its office space, furniture, and equipment, and performed tax consulting services throughout the first year.

The comparative balance sheets at the beginning and end of the year 2009 appear in Illustration 23-3. Illustration 23-4 shows the income statement and additional information for Tax Consultants.


First Example - 2009First Example - 2009Comparative Balance Sheets, Year 1

Income Statement, Year 1

Illustration 23-3

Illustration 23-4



Step 1: Determine the Change in CashIllustration 23-3

Chapter 23-19


Step 2: Determine the Net Cash Flow from Operating Activities

A company must determine revenues and expenses on a cash basis.

Eliminate the effects of income statement transactions that do not result in an increase or decrease in cash.

Convert net income to net cash flow from operating activities through either a direct method or an indirect method.

Chapter 23-20


Step 2: Determine the Net Cash Flow from Operating Activities

Illustration 23-5

Chapter 23-21

Direct Method Deducts operating cash disbursements from operating cash receipts.

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

“Net cash provided by operating activities” is the equivalent of cash basis net income.

Illustration 23-6


Chapter 23-22

Direct Method


Illustration 23-6


Accounts ReceivableAccounts Receivable1/1/09 Balance

0Revenues

125,000

Receipts from customers

89,00012/31/09 Balance

36,000

Chapter 23-23

Direct Method


Illustration 23-6


Accounts PayableAccounts Payable1/1/09 Balance

0Operating expenses

85,00012/31/09 Balance

5,000

Payments for expenses

80,000

Chapter 23-24

Direct Method


Illustration 23-6


Income Tax Payable1/1/09 Balance

0Tax expense

6,00012/31/09 Balance

0

Payments for taxes

6,000

Chapter 23-25

Indirect Method Adjusts net income for items not affecting cash.


Common adjustments to Net Income (Loss):Depreciation and amortization expense.Gain or loss on disposition of long-term assets.Change in current assets and current liabilities.

Illustration 23-8


Chapter 23-26


Step 3: Determine Net Cash Flows from Investing and Financing Activities

Illustration 23-3

No long-term assets, thus no No long-term assets, thus no investing investing activitiesactivities..

LO 5 Determine net cash flows from investing and financing activities.

Chapter 23-27



Illustration 23-3

Purchase of common stock for $60,000 (Financing).


Chapter 23-28



Illustration 23-3

Net income of $34,000 (Operating). Dividends paid of $(14,000)

(Financing).LO 5 Determine net cash flows from investing and financing

activities.

Chapter 23-29


Statement of Cash Flows - 2009 Illustration 23-9

LO 6 Prepare a statement of cash flows.

Chapter 23-30

E23-6: KRC Company’s financial statements for the year ended December 31, 2010, contained the following condensed information.

Operating Activities — Indirect MethodOperating Activities — Indirect Method

2010 2009 ChangeRevenues f rom fees 840,000$ Operating expenses 624,000 Depreciation expense 60,000 Loss on sale of equipment 26,000

I ncome before income tax 130,000 I ncome tax 40,000

Net income 90,000$

Accounts receivable 37,000$ 59,000$ (22,000)$ Accounts payable 46,000 31,000 15,000 I ncome taxes payable 4,000 8,500 (4,500)


Chapter 23-31

E23-6: Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2).

Cash flows f rom operating activitiesNet income 90,000$ Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense 60,000 Loss on sale of equipment 26,000 Decrease in accounts receivable 17,000 I ncrease in accounts payable 10,000 Decrease in income taxes payable (4,500) Net cash provided by operating activities 198,500


Operating Activities — Indirect MethodOperating Activities — Indirect Method

Solution on notes page

Chapter 23-32


2010 2009 ChangeRevenues f rom fees 840,000$ Operating expenses 624,000 Depreciation expense 60,000 Loss on sale of equipment 26,000

I ncome before income tax 130,000 I ncome tax 40,000

Net income 90,000$

Accounts receivable 37,000$ 59,000$ (22,000)$ Accounts payable 46,000 31,000 15,000 I ncome taxes payable 4,000 8,500 (4,500)

Assume accounts

payable relates to operating expenses.

E23-5: KRC Company’s financial statements for the year ended December 31, 2010, contained the following condensed information.

Operating Activities — Direct MethodOperating Activities — Direct Method

Chapter 23-33

E23-5: Prepare the operating activities section of the statement of cash flows using the Direct method (Step 2).


Illustration 23-22


Accounts Receivable1/1/10 Balance

59,000Revenues

840,000

Receipts from customers

862,00012/31/10 Balance

37,000

Chapter 23-34

Accounts Payable1/1/10 Balance

31,000Operating expenses

624,00012/31/10 Balance

46,000LO 4 Contrast the direct and indirect methods of

calculating net cash flow from operating activities.

Illustration 23-24


Payments to suppliers

609,000


Chapter 23-35

Income Tax Payable1/1/10 Balance

8,500Income tax expense

40,00012/31/10 Balance

4,000LO 4 Contrast the direct and indirect methods of

calculating net cash flow from operating activities.


Payments for income tax

44,500

Illustration 23-24


Chapter 23-36

Cash fl ows f rom operating activitiesCash receipts f rom customers $862,000 Cash paid f or operating expenses (609,000)Cash paid f or income taxes (44,500)

Net cash provided by operating activities $208,500




Solution on notes page

Chapter 23-37

E23-2 (a): Plant assets that had cost $25,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300.


Step 3: Determine Net Cash Flow Step 3: Determine Net Cash Flow from Investing and Financing from Investing and Financing

ActivitiesActivities

Plant assets (cost) 25,000$ Accumulated depreciation ([$25,000 / 10] x 6) 15,000 Book value at date of sale 10,000 Sale proceeds (5,300) Loss on sale 2,700$

Chapter 23-38

Statement of Cash Flows (a,b,d,h)Statement of Cash Flows (a,b,d,h)Statement of Cash FlowsCash flow from operating activitiesNet income (loss) (50,000)$ Adjustment to reconcile net income to cash:

Loss on sale 2,700 Depreciation expense 22,000 Gain on sale (9,000)

Cash f rom operations (34,300) Cash flow from investing activities

Sale of plant assets 5,300 Sale of land 39,000

Cash f rom investing activities 44,300 Cash flow from financing activities

Sale of common stock 330,000 Purchase of company stock (47,000)

Cash f rom financing activities 283,000 Net Change in Cash 293,000$

OO

II

FF

Chapter 23-39

E23-2 (b): During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $33 a share.

E23-2 (b)E23-2 (b)

Shares sold 10,000 Market value per share 33$ Value of shares 330,000$


Chapter 23-40








OO

II

FF

Chapter 23-41

E23-2 (d): The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash.

E23-2 (d)E23-2 (d)


Chapter 23-42








OO

II

FF

Chapter 23-43

E23-2 (h): During the year, treasury stock costing $47,000 was purchased.

E23-2 (h)E23-2 (h)


Chapter 23-44








OO

II

FF

Chapter 23-45








OO

II

FF

Chapter 23-46 LO 7 Identify sources of information for a statement of cash flows.

Sources of Information for the Sources of Information for the Statement of Cash Flows Statement of Cash Flows

1. Comparative balance sheets.

2. An analysis of the Retained Earnings.

3. Writedowns, amortization charges, and similar “book” entries, such as depreciation, because they have no effect on cash.


Net Cash Flow from Operating Net Cash Flow from Operating Activities—Indirect Versus Direct Activities—Indirect Versus Direct

MethodMethodAdjustments Needed to Determine Net Cash Flow from OperatingActivities — Indirect Method

Illustration 23-18


Net Cash Flow from Operating Net Cash Flow from Operating Activities—Indirect Versus Direct Activities—Indirect Versus Direct

MethodMethodDirect Method - Companies adjust each item in the income statement from the accrual basis to the cash basis. Illustration 23-21

Chapter 23-49

Direct Versus Indirect ControversyDirect Versus Indirect Controversy

LO 7 Identify sources of information for a statement of cash flows.

In Favor of the Direct Method

Shows operating cash receipts and payments.

Information about cash receipts and payments is more revealing of a company’s ability 1. to generate sufficient cash from operating

activities to pay its debts,

2. to reinvest in its operations, and

3. to make distributions to its owners.

Chapter 23-50

Direct Versus Indirect ControversyDirect Versus Indirect Controversy

LO 7 Identify sources of information for a statement of cash flows.

In Favor of the Indirect Method

Focuses on the differences between net income and net cash flow from operating activities.

Provides link between the statement of cash flows and the income statement and balance sheet.Special Rules Applying to Indirect MethodsDisclose Interest paid.Disclose Income taxes paid.

Chapter 23-51

Special Problems in Statement Special Problems in Statement PreparationPreparation

LO 8 Discuss special problems in preparing a statement of cash flows.

1. Adjustments similar to depreciation

Amortization of limited-life intangible assets.Amortization of deferred costs.Amortization of bond discount or premium.Changes in deferred income taxes.Change related to an investment when recording income or loss under the equity method.

Chapter 23-52

Special Problems in Statement Special Problems in Statement PreparationPreparation

LO 8 Discuss special problems in preparing a statement of cash flows.

2. Accounts receivable, net

3. Other working capital changes

4. Net losses

5. Gains

6. Stock options

7. Postretirement benefits

8. Extraordinary items

9. Significant noncash transactions

Chapter 23-53

Use of a WorksheetUse of a Worksheet

LO 9 Explain the use of a worksheet in preparing a statement of cash flows.

A worksheet involves the following steps.Step 1. Enter the balance sheet accounts and their beginning and ending balances in the balance sheet accounts section.Step 2. Enter the data that explain the changes in the balance sheet accounts and their effects on the statement of cash flows in the reconciling columns of the worksheet.Step 3. Enter the increase or decrease in cash on the cash line and at the bottom of the worksheet. This entry should enable the totals of the reconciling columns to be in agreement.

Chapter 23-54

Companies preparing financial statements under iGAAP must prepare a statement of cash flows.

Both iGAAP and U.S. GAAP require that the statement of cash flows should have three major sections—operating, investing, and financing—along with changes in cash and cash equivalents.

Similar to U.S. GAAP, the cash flow statement can be prepared using either the indirect or direct method under iGAAP.

Chapter 23-55

iGAAP encourages companies to disclose the aggregate amount of cash flows that are attributable to the increase in operating capacity separately from those cash flows that are required to maintain operating capacity.

The definition of cash equivalents used in iGAAP is similar to that used in U.S. GAAP.

iGAAP requires that noncash investing and financing activities be excluded from the statement of cash flows. Instead, these noncash activities should be reported elsewhere.

Chapter 23-56

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Chapter 23

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